Cash Affordability?

[LivingAlmostLarge]

Does saving cash to buy an item mean you can afford? I started a poll on my blog about it here (please vote).

But for example, just because I save $25k for a new car, but I only make $50k, does it mean I can afford it because I've saved up cash for it?

Or is there a point where even if you save it up it's not affordable?

[disneysteve]

Originally Posted by LivingAlmostLarge

Does saving cash to buy an item mean you can afford?

Absolutely not.

Let's say you've saved up $5,000 to take a vacation. But you also happen to have $20,000 in credit card debt. Just because you are paying cash for the trip doesn't mean you can afford it. It just means you've delayed repaying your debt by that much longer in order to spend more money that you don't really have.

You also need to look at other factors. Perhaps you have no debt and saved up that same $5,000 for a vacation. But you are not participating in your company's 401k. You aren't funding a Roth. You have no emergency fund. Just because you have that 5K in cash doesn't mean you can afford to blow it on a vacation.

[Snave]

This could be on the thread "Worst Justifications for Spending Money." I gurantee people have used this one thinking that if they saved the cash for it then they could afford it. Having the money to physically purchase something and being able to afford it are two entirely different things. To me, being able to "afford" something means that you can purchase an item and are not jeopardizing any of your other financial responsibilities in doing so. In Steve's scenarios, the person could physically pay the cash, but was putting off other financial responsibilites such as paying off the credit card, etc... Then, there is the chance that you can afford it and it is just not practical. That might be the scenario you present with the car. In that scenario, someone might have their finances in a row, and even though they can "afford" the car, it just doesn't make good sense.

[MonkeyMama]

I read your blog and I think this is kind of a different issue. The original poster seem to be misled to believe that having no debts meant they could afford anything. That simply is not true. They are surprised they can't afford $30k cars and $5k vacations. Like they could magically afford this is they started paying cash for everything...

Anyway, I have to agree with the above. In general, I think saving up the cash buys tremendous freedom. But every dime you spend has an opportunity cost (e.g. future investment returns if it was invested instead). Likewise, just because you have cash doesn't mean all your ducks are in a row.

[SnoopyCool]

No, and especially not for something like a car, where you have ongoing costs like insurance, maintenance and gas, etc.

[Like2Plan]

LivingAlmostLarge,
I read your blog--very good points, but what does FFEF stand for (I think the EF=emergency fund, but can't figure out the ff)

[Ima saver]

Like, I feel sure it means, fully funded emergency fund. For me, that is at least 6 months of living expenses in an emergency fund, because my husband is self employed. I have about 10 times that amount in mine.

[Like2Plan]

Ima,
Thanks--that makes sense.

[fruitbowlk]

Originally Posted by SnoopyCool

No, and especially not for something like a car, where you have ongoing costs like insurance, maintenance and gas, etc.

This is the example I was going to use.

[LivingAlmostLarge]

So affordability is based on income not on whether you save cash? I keep reading save up cash and you can buy any car. People rarely tell you no, you can't afford this $30k car if you make say $50k. They say fine you saved for it.

But realistically it's not a great move probably.

[Caoineag]

Its not just income either. Affordability is based also on priorities. A good example of that is me. I say no car is affordable in my household. Why not? We make good money, we could save up the cash BUT our other priorities cost money. Since we want these other things more, we can't afford the car as well.

[disneysteve]

Originally Posted by LivingAlmostLarge

So affordability is based on income not on whether you save cash?

No, it isn't based on income either. You may make a ton of money but have a ton of debt and no savings. In that case, you still can't afford the fancy car or big screen TV or whatever it is because you don't have your financial house in order.

[maat55]

Originally Posted by LivingAlmostLarge

So affordability is based on income not on whether you save cash? I keep reading save up cash and you can buy any car. People rarely tell you no, you can't afford this $30k car if you make say $50k. They say fine you saved for it.

But realistically it's not a great move probably.

DR says that, all the cars in your family should not exceed 50% of your income. Say you make 100,000 a two car family should have two 25,000 or less. You can arrange the numbers however you like such as 10,000 40,000 etc. The point is to not have too much of your net worth tied up in assets that loose value. I personally stay below 50% to play catch up.

[LivingAlmostLarge]

50% of income seems like a lot. Personally not sure but if this is the case then how are so many people affording two Honda Accords or Accord and CRV? Those are each $25k and yet do people really earn $100k to make each person driving one feasible?

I haven't heard the 50% rule, what I've heard not only from Dave Ramsey is if you save you can afford anything. You can have a jag, you can have a lexus, if you save the cash for it.

[Gruntina]

That is a toughie! I agree with DisneySteve but also it is really hard to make a general guideline of what you can afford or not afford.

For many here on this board will think I pay too much for my home (36%) as I am going over the rule of thumb 25-30%. I think my home is my shelter but also entertainment as it is fun to live there. I have large land and large scale gardening and landscape that I enjoy walking around and maintaining when I get home after work. I rather be in my garden than to take a long week vacation staying in a resort somewhere. I live in an area far from the cities and no temptation to shop or eat out and no pressure to please others. That is my balance and I do not miss eating out anyways as my husband is a wonderful chef.

We have savings, tithing’s, and retirement all set up and contributing each month so we are not lacking in this area but we do have to work at it to make sure we are on top of our finances and check our progress like normal people. My luxury is if I save extra money, it would be going toward more plants and home stuff. It would seem to others that these are frivolous purchases and seem like we should not be able to afford to do that because we already pay so much for our home.

I really cannot imagine doing something else and I feel like I am already living my golden years even though I am still working and in my early 30's.

I do not like hearing about these 'percentage' rules as it seems like everyone should have everything everyone else have in life squeezed on their plates(so much like the Jones’) instead of choosing just what they want. Some discipline is needed here because not everyone can have everything they want at the same time.

[maat55]

Originally Posted by LivingAlmostLarge

50% of income seems like a lot. Personally not sure but if this is the case then how are so many people affording two Honda Accords or Accord and CRV? Those are each $25k and yet do people really earn $100k to make each person driving one feasible?

I haven't heard the 50% rule, what I've heard not only from Dave Ramsey is if you save you can afford anything. You can have a jag, you can have a lexus, if you save the cash for it.

DR says that when you have a million dollars, then you can buy a new car. Now, this can be cretiqued as being impossible for the auto industry, but the idea is to invest less in car than people normally do.

For a family earning 60,000, that would mean two 15,000 cars. As the income comes down, the cars get scarce. What I stated above about assets is what he says about car ownership. Your also, by his plan, are to invest 15% before you save for autos. You will rarely here Dave say a person can afford a jag.

[disneysteve]

Originally Posted by LivingAlmostLarge

50% of income seems like a lot. Personally not sure but if this is the case then how are so many people affording two Honda Accords or Accord and CRV? Those are each $25k and yet do people really earn $100k to make each person driving one feasible?

Those folks are living beyond their means buying, or more often leasing, cars that they really can't afford. I think the 50% rule is too high. Should be even less than that.

[gekkoplus]

A realistic figure could be -

Debt + Car = (Total gross income - Taxes - 401k) / 2

So if your gross income=100K, taxes=30K, 401K=15K and no debt -

(100K - 30K - 15K) / 2 = 55K / 2 = 27.5K

If you have a annual debt of 10K, then maximum you should spend on car = 17.5K

How's that? Of course this is plain simple generalization of a complex problem, and may not work in a few cases.

[disneysteve]

Originally Posted by Gruntina

For many here on this board will think I pay too much for my home (36%) as I am going over the rule of thumb 25-30%.

Actually, I think that rule of thumb is 28% home, 33% (or maybe 36%) total toward debt. So if you are otherwise debt-free, you are probably within, or very close, to that rule of thumb, which I still think is a good one.

But you make a good point about priorities, something we talk about often around here. If your priority is your home and you are willing to forgo or limit other things like vacations, fancy cars, dining out and such, that's fine. You are saving, tithing, funding your retirement and otherwise sound like you have all your financial ducks in a row. Nothing wrong with that at all.

The problem arises with the person who might be spending 35% on their home, 10% on travel, 35% going to taxes and insurance, and 20% to vehicles, entertainment and miscellaneous spending. That adds up to 100%. Savings - zero. Retirement - zero. Emergency Fund - zero. In fact, the total often adds up to greater than 100% when credit card debt gets added to the mix. Those are the folks that are heading for trouble.

[maat55]

I respect an individuals desire to invest more in home and drive much cheaper cars. I myself, due to not investing well at a younger age, prefer to prioritize investing, house then car. My wife prefers house, car, then investing.

I think the percentage for spending on cars should depend on age and how well on track you are for your other priorities. ( EF's, home and retirement)